Seven Springs Farm, Inc. v. Croker

Supreme Court of Pennsylvania · 2002 · Corporations

Corporationsclose corporationbuy-sell agreementright of first refusalmergercash-for-stock mergercontract interpretationstrict construction

Facts

Seven Springs was a closely held family corporation whose shareholders were bound by a 1969 buy-sell agreement restricting a stockholder from transferring, assigning, selling, or otherwise disposing of stock without first giving notice and offering purchase options to the corporation and other stockholders. In 1997, the shareholders amended the agreement to allow holders of 75% of the stock to waive the restrictive transfer provisions for certain high-value stock sales, while ratifying the remaining provisions. In 1998, two family branches holding two-thirds of the stock supported a sale of the company to Booth Creek through a merger in which a Booth Creek subsidiary would merge into Seven Springs and existing Seven Springs shares would be converted into rights to receive cash and deferred cash payments. Croker, representing the Phillip Dupre family branch, opposed the transaction and claimed the merger triggered the agreement's right of first refusal.

Issue

Whether a proposed cash-for-stock merger triggered the right of first refusal in Seven Springs' buy-sell agreement. More specifically, whether the agreement's restriction on a 'Stockholder' transferring or otherwise disposing of stock applied to a merger authorized and effected as a corporate act under Pennsylvania law.

Rule

When a buy-sell agreement unambiguously restricts only stockholder transfers of stock, and does not expressly restrict corporate merger action, a merger authorized and effected under the Pennsylvania Business Corporation Law is a corporate act rather than a shareholder act and does not trigger the agreement's right of first refusal. Restrictive transfer provisions are strictly construed, and no additional restriction will be inferred absent express language.

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Blue Harbor Outfitters, Inc., a closely held Pennsylvania corporation in Erie, has a shareholder agreement stating that no shareholder may "sell, assign, transfer, pledge, or otherwise dispose of" shares without first offering them to the corporation and the other shareholders. The agreement says nothing about mergers or other fundamental corporate changes. Blue Harbor's board approves a cash-for-stock merger with a newly formed buyer subsidiary, and a majority of shareholders vote in favor.

If a dissenting shareholder argues that the agreement's right of first refusal was triggered, what is the best answer?

Explanation. The majority rule is that when an agreement unambiguously restricts only a shareholder from transferring or disposing of stock, and does not expressly restrict merger action, a statutory merger is a corporate act rather than a shareholder act. Shareholder approval does not itself amount to a restricted shareholder disposition. Restrictive transfer provisions are strictly construed, so no merger restriction is inferred absent express language. (Derived from Seven Springs Farm, Inc. v. Croker (2002).)